Common money laundering scams targeting law firms

Tips and tricks: money launderers are becoming more sophisticated and law firms need to keep upCredit:
alamy

23 February 2017 • 10:30am

Nicola Laver and Anthony Blackham

It’s a sad fact that few businesses are safe from criminals, and the nature of professional services puts many firms in the crosshairs for money laundering scams of all shapes and sizes.

Many lawyers associate money laundering in their sector with property transactions, but the problem is more widespread than that, and litigation departments are increasingly a target. JP, a solicitor at a 16-partner corporate and commercial law firm (which wishes to remain anonymous), was targeted in January 2017 by money launderers in Taiwan.

JP explains its modus operandi: “We’ll sometimes get contacted by a potential new client purporting to be from say Taiwan or China, or another overseas jurisdiction. They’ll email us saying, ‘We’ve got litigation because of a dispute with a business based not far from you, and we want you to act for us.’

Gut feeling was the first thing to raise the alarm

“On this occasion, we run a conflict check and see nothing untoward, and the potential client says, ‘Great! Can you send us your terms ASAP as we want you to act in this dispute.’ We do so, and very quickly they respond by saying, ‘These are fine. We agree and want to give you £50,000 on account of costs’.”

At this point, says JP, the firm knew something was not quite right. “What happens then (if you fall for it) is that they will then forward the £50,000 and you think, ‘Crikey, that’s good – a nice client paying your fees upfront.’ They’ll then contact you a week later saying they’ve settled the claim. You haven’t done any work for them, but a small fee for your initial time is deducted and the balance is asked to be sent back to them.”

The result, of course, is clean money going back to the money launderers. This is sham-litigation money laundering1, and JP says you almost have to admire the criminals for their ingenuity.

He says the firm has seen two or three attempts at sham-litigation money laundering in the past 12 months. In this latest episode involving his firm, gut feeling was the first thing to raise the alarm among the firm’s partners.

You almost have to admire the criminals for their ingenuity

“It didn’t feel right. It just felt too keen and a bit weird,” JP says. “When we asked them how they came to contact us, it was unclear. The contract they sent us had a US governing law clause so I asked why they were wanting us to act for them, because I suspected there was something wrong with it. I told them that they needed US lawyers.”

All money-laundering attempts are reported to the firm’s insurer and to the money-laundering reporting officer (MLRO) as required by the regulator. Under the Proceeds of Crime Act (POCA) 2002, it is a legal obligation on anybody who has suspicions that money laundering is taking place to submit a suspicious activity report (SAR) to the National Crime Agency. That is what the firm’s MLRO did in this case.

JP adds that, while the firm identified the attempted deal, he has no doubt that the would-be launderers would go on to try again with another firm.

A persistent threat

JP’s firm has also been the target of many attempted email scams to get the firm to transfer money. JP says: “The fraudsters will email our head of finance and ask him to arrange for a transfer of money from the firm’s office account to a particular client’s account.” Normally, such spurious emails are easy to dismiss as spam, but in this instance “it looked like it had come from me”.

Even if an email looks genuine, JP says that there are policies in place so that if a partner is asking people to send money, that request is subject to internal checks first. In the case of a request to send money to a client, “we will ring the client and ask them if they have emailed, and most clients do appreciate us checking”.

Crispin Passmore, executive director at the Solicitors Regulation Authority (SRA), says such checks are essential. Moreover, “finance staff need to be empowered to query partners so that, for example, payments should not be made on the basis of a single instruction. And no single person should have the power to make payments. It may look like bureaucracy, but it is simple self-protection.”

While the attempts made on JP’s firm were spotted, he warns that the criminals are highly sophisticated and must be taken seriously. He says: “Law firms must be alive to it. The banks are obviously alive to it. Law firms’ insurers are very, very alive to it. They offer specific policies for this because you wouldn’t be covered by your professional negligence policy.”

Last year the SRA published a full report on the risk and scale of the money-laundering challenge facing solicitors. Mr Passmore says this reflected the accelerating growth in money laundering and the vulnerability of solicitors to being caught up in it. “Five years ago this wasn't regarded as a high-risk issue by some firms,” he says. “Now most firms do take it seriously. Many are well set to deal with the risks, but some still need to improve. The right training and culture are as important as having proper systems in place.”

No single person should have the power to make payments. It may look like bureaucracy, but it is simple self-protection

Mr Passmore says there is vulnerability to risk across all types of firm, large or small. And the inventiveness of criminals is considerable. “Constant vigilance is essential. You can fall victim to money laundering because of poor systems or due to gullibility.” Only rarely are there cases of active involvement by solicitors, but that is little succour to the MLRO who has the task of keeping their firm’s reputation intact.

That is because the consequences of being tangled up in money laundering (even inadvertently) are so serious, warns Mr Passmore. They come in terms of damage to reputation, to the cost of insurance and also penalties from the Solicitors Disciplinary Tribunal – which could result in suspension or being struck off. And of course, as the activity is illegal, there could be sanctions including prison sentences.

“Precautionary measures should be taken right across the firm, including working with young associates who might be especially keen to be seen to be bringing in business,” he says. “Everyone needs to be part of the anti-money-laundering culture.”

Know the risks from money launderers

The UK’s professional services companies are being targeted by money launderers, who use legitimate firms to bring the proceeds of serious and organised crime into the economy, investing it further into criminality and undermining the integrity of UK financial institutions and markets.

The Home Office is working with professional services firms through its Flag It Up! campaign to help honest enterprises avoid becoming enablers of crime.

Visit tgr.ph/homeoffice for more information about the dangers of money laundering and the steps being taken to combat it.